TORONTO, ON–New research from York University’s Schulich School of Business shows that boards with inside directors make better decisions when it comes to hiring new CEOs.
The findings are contained in the paper, “Do Insiders Hire CEOs with High Managerial Talent”, which was recently published in Review of Finance. The paper is co-authored by Yelena Larkin, Associate Professor of Finance at Schulich, and Jason D. Kotter, an Assistant Professor of Finance at the Marriott School of Business at Brigham Young University.
Using a newly devised metric for measuring managerial talent, the researchers examined the effect of the composition of a company’s board of directors – and inside directors in particular – on a firm’s CEO hiring decision. The researchers found that boards with inside directors – especially those with non-CEO backgrounds – more effectively screen for top managerial talent and tend to hire CEOs with greater managerial skills.
Why does having an inside director on the board lead to hiring CEOs with more managerial talent?
Their research data shows that inside directors have stronger financial and reputational incentives to screen for managerial ability given that they have much more equity wealth tied up in the firm and will end up working more closely with the new CEO hire.
“This study provides the first evidence that inside directors have a demonstrable and distinct impact on CEO selection,” says Larkin. “Our research indicates that inside board directors can benefit a company by increasing the probability of hiring talented managers. And because inside directors have strong incentives to hire a capable CEO, they are particularly well suited to participate in the screening of CEO candidates.”
Known as Canada’s Global Business School™, the Schulich School of Business in Toronto is ranked #1 in Canada and among the world’s leading business schools by a number of global MBA surveys, including The Economist, Forbes, and QS. The Kellogg-Schulich EMBA program is ranked #9 in the world by The Economist, #9 in the world among joint programs by QS MBA, and #1 in Canada by the Financial Times.
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